Board of Director Functions
The board of directors function is primarily that of corporate governance. Corporate Governance is the method by which a corporation or organisation is governed or controlled. How it is run and administered and what policy and guidelines it operates from.
The type of governance a corporation will have will depend on a number of factors. Size is one, ownership structure. Even the power structure, who controls what. Also the type of industry and community framework will have a bearing on the corporate structure and governance used by a company.
Corporate governance has been defined by the ASX Corporate Governance council as, “the framework of rules, relationships, systems and processes within and by which authority is exercised and controlled in corporations.”
It also includes those methods by which companies and those directing and controlling the company are held responsible for the company and can be held therefore to account.
Companies come in all shapes and sizes and structures. The governance that applies will vary according to the type of company it is. A small two director company with less that 10 employees and under one million dollars turn over will operate very differently to a large corporation of thousands of employees, a full board of 7 or ten directors with various committees and sub committee and a turn over of billions of dollars.
In addition public companies needed to conform to the Listed Rules for the Exchange, for ASX listed companies.
But the basics of corporate governance remain regardless of the size and type of company.
The directors must carry out or ensure is carried out the legal requirements of corporation and ensure that the corporation or company complies with statutory and common law as applies to businesses.
Functions of the Board
The board of directors of a company has very specific functions.
The board of directors job is to manage or direct the management of the company to steer and guide the company in achieving its objectives. This includes making sure the company adds value to itself. The company improves its performance and doing this by formulating the correct strategy and policies.
It also includes monitoring the performance of the company and ensuring that it is in the interests of the shareholders, that it meets the goals and objectives of the company as set whilst complying with all the legal regulations and also managing risk effectively.
The board also has the duty of overseeing and monitoring the CEO and recruiting one where there is not one. The can also fire the CEO if they consider the CEO is detrimental to the companies interest.
In a very small company the board might also be the management and take a ‘hands on’ approach. But by and large the larger the company the more the board will appoint management teams to apply the policies, strategies and objectives set by the board.
The boards function is to:
Appoint a competent and effective CEO
Appoint and monitor the performance of management to ensure that regulatory compliance is effected, to ensure that appropriate risk management is in place and above average performance is being strived for.
Strategic direct is an important part of the boards duties. Setting a strategic direction that enhances and forwards the purpose and goals and targets of the company. Setting policies that enable management to apply and achieve the aims of the company.
Ensuring that the relevant resources such as money, management, manpower and materials are available. Appointing a CEO and having a succession plan. Ensuring that the interests and value of the shareholders are correctly applied to improve the performance of the company.
Monitoring the performance of the organisation and the strategies that have been put in place.
Most important is ensuring that compliance with the various regulatory legal and accounting standards are being in effect. This is where committees, for larger companies, can assist. Committees to monitor and ensure compliance with the various laws and guidelines imposed on companies and on board members. The board has a duty to ensure the company is complying with the various regulations and there can be stiff penalties where a board has been remiss in this. If a director cannot show they have done all they can to ensure legal compliance then they can face fines or worse imprisonment.
Setting the risk for the company is an important factor for the board to consider. Ensuring that the appropriate risk for each area is most important and a correct balance in managing risk between the board and the management team is most important. Some risk, say with mergers, large acquisitions etc, should probably be attended to by the board but lower level risks can be handled by the management team although the board may and should want to be able to monitor risk as it applies to the purposes and objectives of the company.
The board is accountable to the shareholders and should be reporting progress and matters of interest to the shareholders. This might include the direction the board is taking with regard to the company, any change of direction, any acquisition or divestment of a significant asset and full disclosure of matters which the board consider are significant to report to the shareholders.
The boards functions could be boiled down to:
Formulating strategy and approvals
Selecting an appropriate CEO and monitoring, evaluating and setting the remuneration and the removal if found necessary as well as setting and having a succession plan.
Making sure that appropriate governance process are in place and used by the board.
Setting the culture for the company and ensuring it is in place and understood.
Monitoring and controlling the companies performance.
Putting into place appropriate risk management and monitoring it to ensure it is effective and there are no sudden surprises.
Making sure the company complies with the various regulatory bodies and the law.
Designing a big picture and having policy to forward it.
Ensuring communication facilities are in place with the various important stakeholders, such as shareholders, management, CEO, customers, clients debtors and creditors of the company.
Having a crisis control policy in place
Having a network in place to effectively improve relations with other groups and individuals as they affect the company.
This is just an outline of some of the functions of a Board of Directors. The main criteria is that the board are conscious of their responsibilities as regards the governance and duty of care for the organisation they represent.